Milton Friedman Comes Close…

When it comes to the euro, the late Milton Friedman is starting to look a lot like a prophet whose time is at hand; one vindicated so overwhelmingly by posterity that you start to believe in clairvoyance.

One of the 20th century’s undisputed economic champions, it’s fair to say Friedman never thought much of the single currency’s chances. Way back in 1999, when the euro at last set sail as an accounting unit, the great man wondered whether it would even be able to survive a first economic crisis.

He said:

“It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.”

Won’t they though?

Now Greece and Ireland are on their backs and the vultures are circling over Portugal, casting sidelong glances at Spain, those contradictions are writ large. How can nations never distinguished economically in the modern era live with interest rates set for the convenience of Germany, arguably its greatest success story? Disparities among euro-zone fiscal policies were bizarre enough in the good times; in the bad ones they’re unavoidably stark.

And yet…

Last week brought news that confidence among German businesses was as high as it’s been since East and West were re-united in 1990. Not famed as the most exuberant demographic, you’d expect this lot to be terrified of systemic risk if they thought their currency was about to unravel. Not a bit of it, it seems.

But perhaps this only highlights one of Friedman’s contradictions: the euro zone’s core is in clover while its periphery stumbles through the nettles. And yet…

Look at European stocks. For sure, the Stoxx Europe 600 and 50 indexes have taken a knock while Ireland’s agony has played out but, once again, they don’t look like indexes hunkering down for systemic nightmare either.

Perhaps the world of financial market commentary is too full of Friedmanites, doubtful of the euro’s very novelty even if not overtly hostile to the socialism of many of its member states. For them this long crisis is an expression of the euro’s underlying lack of logic and rigor, the great ‘I told you so’ moment.

But the current political generation has too much invested; it will defend the single currency with all it has, and, for now, markets seem convinced of that.

As long as the global economy keeps staggering upward perhaps that political will and vast backstops of cash will keep the euro together, despite its contradictions. But that’s not a trick for the long term. The fiscal balancing Europe has been signally unable to produce up to now will have to come out of the hat very soon.

Maybe Friedman will miss by a whisker. He should have staked his reputation on the second crisis tearing the euro apart instead.

Comments (5 of 6)

A year and a half after this article was published, and it looks like Friedman's position may yet prove to have been correct. Not that nay-sayers such as Mr. Boehman above would ever notice. They seem to be too occupied with confusing the political actions of Pinochet with the economic recommendations of Friedman, while of course failing to acknowledge that market reforms have led to Chile currently being one of the most prosperous nations in South America.

3:17 pm May 7, 2012

Alyana wrote:

Everything Barack Obama, the Federal Reserve, and Congress are doing was predicted in snlitartg detail almost two decades ago by a famous Nobel Prize-winning economist.His name was Milton Friedman.Though he passed away in 2006, in his prophetic book, Friedman showed how, facing massive deficits, the U.S. government would dramatically increase the money supply; why foreign countries would stop buying our debt; how the Fed would start buying our Treasury bills; and why this would call cause massive inflation.He even predicted that our officials would claim inflation was no problem at all.Amazingly all of this is coming to pass!Make no mistake about it the Obama administration is embracing massive inflationary deficit spending.In just a few months, Barrack Obama has more than doubled the U.S. money supply committed the government to nearly $24 trillion in new spending . . . and warned the American people to expect trillion-dollar deficits for the foreseeable future.While the media has been falling over itself to praise Obama\'s "bold initiatives," the question no one has been asking is, "Where is all of this money coming from?"Decades ago, Milton Friedman answered these questions clearly and precisely in his insightful and very topical book, Money Mischief: Episodes in Monetary History.In Money Mischief, Friedman even warned that the coming inflation could "destroy" our country.Here\'s what he wrote: "Inflation is a disease, a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society." (Money Mischief, Page 191)You see the end result of that process in countries like Zimbabwe today, where prices double every day, and it now takes a $10 billion Zimbabwe note to buy a single loaf of bread assuming you can find one.Could America suffer the same fate? Friedman wrote ominously, "The Fate of a Country Is Inseparable From the Fate of Its Currency."Even Warren Buffett recently admitted on CNBC that the only way for the U.S. to solve it\'s woes was to inflate the currency.There is little doubt that Obama\'s massive deficit spending will doom the dollar and our economy.

6:40 am December 24, 2011

Warren Hardin wrote:

@Craig Boehman- It is such a large assumption to pin an entire nations failing on one man. You say history has proven MIlton Friedman wrong? I didn't know that Craig Boehman was such a great economist, i have never heard of you. If you're going to list failures then you better list how and not why they are failures. How did Chile fail? Hong Kong is one of the most robust economies in the world and they have a small amount of land and no natural resources to export like oil. They abide by the free market system and their standard of living is much higher then their next door neighbor, China, who are a bunch sleazy communists. Accusations are talk and its cheap.

6:59 am December 3, 2010

Craig Boehman wrote:

Einstein may be to cosmology what Friedman was to economics, but that doesn't make Friedman a "great man." Not when you consider the sordid underbelly of his influence.
It's out of context with your subject, I quite understand. But I never feel the need to comment on discussions of Einstein's predictions on gravitational waves when the man himself was not a personal adviser to a tyrant -- unapologetically, without remorse.

My apologies for my accusation. No one in their right mind would be compelled to worship such a man.

7:46 pm December 2, 2010

David Cottle wrote:

With all possible respect I don't think the article really qualifies as idolatry. I merely point out that, while Friedman might look scarily prescient now in suggesting the euro will collapse with its first crisis, he is on balance still likely to have been wrong.

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